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The U.S. Supreme Court’s surprising decision to revisit a 26-year-old decision limiting
states’ tax authority over online sales presents a multitude of potential outcomes,
according to several tax practitioners.

“The court could most certainly tweak the rules, they could also do away with the
whole precedent completely,” Richard D. Pomp, the Alva P. Loiselle Professor of Law
at the University of Connecticut School of Law, told Bloomberg Tax.

The Supreme Court—heeding calls from traditional retailers and dozens of states—
granted review Jan. 12 of South Dakota’s contention that the high court’s 1992 ruling in
Quill Corp. v. North Dakota is obsolete in the e-commerce era and should be overturned. In
Quill, which involved a mail-order company, the Supreme Court invoked the so-called dormant
commerce clause, a judge-created legal doctrine that bars states from interfering
with interstate commerce unless authorized by Congress. The court said that clause
prohibited states from imposing sales and use tax collection obligations on vendors
without a physical presence in-state.

E-retailers Wayfair Inc., Overstock.com Inc. and Newegg Inc.
challenged South Dakota’s digital sales tax statute,
S.B. 106 (S.D. Codified Laws Chapter 10-64), which the South Dakota Supreme Court found unconstitutional
under
Quill—which triggered South Dakota’s appeal to the U.S. Supreme Court. Other similar challenges
are pending in Alabama, Indiana, Tennessee, Virginia, and Wyoming.

Pomp said that overturning
Quill could present major issues for taxpayers.

“If we overturn
Quill, will we then face a crazy situation where each state applies their own individual
and varying threshold for which businesses would then need to collect and remit taxes?”
Pomp said. “If that happens, we will just be where we were before, with taxpayers
pushing for the protections currently offered under
Quill.”

Pomp said that uniformity through a new rule of law, which would establish a new in-state
sales threshold that would trigger retailers’ tax collection obligations, would be
both beneficial and simplistic for states and businesses.

However, Pomp said it’s extremely rare for the justices to submit recommendations
to states. Still, he said the court could hand down a decision that sets forth guidelines
for states—including a recommended sales threshold that would exempt small businesses
from any new tax collection obligations.

Likelihood of Change?

Lila Disque, deputy general counsel for the Multistate Tax Commission, told Bloomberg
Tax she finds it unlikely that the court would grant review in a case just to re-emphasize
a previous decision like
Quill.

“They generally grant cert with an eye toward overturning or distinguishing a case,”
Disque said. “I suspect the most likely conclusion is that the court will find that
a Commerce Clause physical presence standard is no longer sensible, and South Dakota’s
factor-presence standard is reasonable.”

However, Harley Duncan, a tax managing director at KPMG LLP, told Bloomberg Tax he
was south of “50-50" that the high court would overturn
Quill.

Duncan said the high court could simply reiterate its position, stated in
Quill, that state taxation of online sales is an issue for Congress to resolve. “I would
also think the Court could be troubled by the route taken to get the case before the
Court. Of course, I have been wrong pretty much all along the way on this one, so
we’ll see.”

Likewise, Joe Huddleston, an executive director at Ernst & Young LLP’s National Indirect
Tax group and former executive director of the Multistate Tax Commission, told Bloomberg
Tax that while many believe the court wouldn’t have taken this case unless they intended
to overturn
Quill, they can “go in any direction without much warming.”

“It is possible that they could return this issue to the state for the facts to be
presented or they could use the case to lay out rules for sales tax nexus,” Huddleston
said. “I can’t believe that they will want to go down the road of legislating for
the states. They might simply want to make another statement about the legislative
responsibility of the Congress.”

Huddleston said that given the lack of issues in dispute in this particular case,
it’s “anyone’s guess” what the court might do.

Retroactivity

Both Pomp and Disque referred to the issue of retroactivity, which they said was a
huge issue in the 1992
Quill decision. Pomp said the issue of retroactivity will be a key issue to watch for during
oral arguments.

“Also, we feel that if the court overrules
Quill on the basis that the physical presence standard has become unworkable given how
commerce has changed, it would be inconsistent for it to apply that ruling to periods
prior to the making of such a determination,” Disque said.

Technological Advances

Should the Supreme Court highlight technological advancements in overturning
Quill, it could open up new cases.

“The internet has made
Quill a relic,” Pomp said. “It could happen that if the court focuses on technology, then
there may not be a reason for so much protection over taxpayers when it comes to interstate
commerce.”

Pomp said technology could “get us out of the bond were currently in.”

“
Quill is so protective of taxpayers,” Pomp said. “The court could very well feel it’s now
time to protect state governments.”

South Dakota’s opening brief in the case should be due in late February.

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